Anita Kelly, Personal Representative of the Estate of Mae Louise Copley v. Magnum Drilling of Ohio, Inc.

RENDERED: FEBRUARY 24, 2023; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2021-CA-0512-MR
ANITA KELLY, PERSONAL
REPRESENTATIVE OF THE ESTATE
OF MAE LOUISE COPLEY APPELLANT
APPEAL FROM LAWRENCE CIRCUIT COURT
v. HONORABLE JOHN DAVID PRESTON, JUDGE
ACTION NO. 19-CI-00296
MAGNUM DRILLING OF OHIO,
INC.; JAMES H. LARGE; AND
THOMAS CRISP APPELLEES
OPINION
VACATING AND REMANDING
** ** ** ** **
BEFORE: THOMPSON, CHIEF JUDGE; EASTON AND TAYLOR, JUDGES.
EASTON, JUDGE: Anita Kelly, the personal representative of the estate of Mae
Louise Copley (Copley), appeals from an order of the Lawrence Circuit Court
which granted summary judgment in favor of Magnum Drilling of Ohio, Inc.1
(Magnum), Thomas Crisp, and James H. Large, on all claims alleged against them.
We vacate and remand because the circuit court’s ruling regarding at least one
issue of contract interpretation resulted in a premature finding of fact.
FACTUAL AND PROCEDURAL BACKGROUND
In May 1994, Large and Crisp, together with their wives, purchased
more than 250 acres in Lawrence County, Kentucky.2 Large and Crisp are co-
owners of Magnum. At some point, Magnum began drilling operations for the
removal of oil and gas from the Large and Crisp property. However, Magnum’s
unapproved use of a roadway located on the property of their neighbor Raymond
Starr resulted in litigation which ultimately led to our Court determining in 2005
that neither Magnum nor the general public had acquired any right of way over
Starr’s property.
Copley owned and lived on a 54-acre property in Lawrence County
which bordered the property owned by Large and Crisp. After being approached
1
According to deposition testimony, the name of a successor to Magnum Drilling of Ohio, Inc.,
is now Magnum Drilling, Inc. We will refer to the current corporation as Magnum.
2
These facts are taken from the unpublished Court of Appeals opinion in No. 2003-CA-002774-
MR. Starr v. Magnum Drilling of Ohio, Inc., No. 2003-CA-002774-MR, 2005 WL 678582 (Ky.
App. Mar. 25, 2005).
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by Magnum, Copley signed an Oil and Gas Lease (the Lease) with Magnum on
October 3, 2013.
According to Copley, but unbeknownst to her at the time of the
signing of the Lease, Magnum, Large, and Crisp only sought a lease for Copley’s
land because they had found their prior operations effectively “landlocked” after
losing access over Starr’s property. Copley alleged she had been fraudulently
promised lucrative payouts for the extraction of oil and gas from her property, but
Magnum and its officers only wanted her land to conduct extensive operations on
her property to remove oil and gas from neighboring properties Magnum already
owned or leased; operations which greatly and adversely affected her property but
provided her with little remuneration. The relevant terms of the Lease will be
analyzed later in our analysis of its language and the parties’ positions thereon.
After securing the Lease, Magnum “unitized” its Lease for Copley’s
property together with the neighboring properties it also leased or owned.
Unitization refers to combining separately owned mineral or leasehold interests
related to a common supply such as a reservoir or field to create a joint operation
to maximize production and optimize operations. Unitization generally involves a
larger area and is undertaken for purposes of resource conservation. Magnum
alleges Copley’s property “could not have been developed without unitization”
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because extraction operations solely on Copley’s property would not be financially
viable since she only had 54 acres.
Magnum placed four horizontal wells for this unitized operation. A
horizontal well, as opposed to a vertical well, is initially drilled straight down but
then turns in a horizontal direction for several thousand feet to fully extract oil and
gas all along its entire length. Three wellheads (where the oil or gas comes out of
the ground) are located on Copley’s property. The fourth wellhead is on
neighboring property. Regardless of the physical location of the wellheads, the
wells to which they are attached gather oil and gas all along their length.
Therefore, the three wellheads located on Copley’s property produce oil and gas
from deposits located not only below Copley’s property but also from deposits
located below neighboring properties.
On November 22, 2019, Copley filed suit against Magnum, Large,
and Crisp. She alleged four causes of action: (1) Property damage; (2) Piercing
Magnum’s corporate veil to cause personal liability of Large and Crisp; (3) Fraud
in the inducement; and (4) Per the language of the contract, she should be paid for
1/8 of all oil and gas coming out of the wells which Magnum placed on her
property, not just 1/8 of the oil and gas coming from deposits located on her
property. Following discovery, Magnum moved for summary judgment on all
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counts and Copley moved for partial summary judgment relative to her contract
claim.
The circuit court denied Copley’s motion and granted summary
judgment to Magnum dismissing all of Copley’s claims on April 1, 2021.
The circuit court’s order sets forth its analysis and reasoning:
The Plaintiff [Copley] has filed a motion for partial
summary judgment and in the motion asks the Court to
order that the Defendants pay to the Plaintiff an amount
equal to a one-eighth part of the oil produced from the
wells located on the property of the Plaintiff, even though
some of the production comes from property owned by
other individuals.
In their motion, the Defendants state that the
Plaintiff executed and delivered an oil and gas lease on
October 13, 2003, to Defendant Magnum Drilling of
Ohio, Inc. The terms and conditions of the lease allow
the unitization of the Plaintiff’s property with adjoining
properties. The Defendants state that the Copley
property could not be developed without unitization with
other properties, since it contained only fifty-four acres.
The wellhead on three of the four wells was located on
the Plaintiff’s property. A fourth wellhead was located
on adjoining property, but the Plaintiff shares in the
royalties since part of the lateral line is on her property.
The Defendant attached a list of property owners for the
various wells, showing six owners for well 6-H, three
owners for well 7-H, three owners for well 8-H, and three
owners for well 9-H. From the record, it appears that all
of the owners share in the production from the wells to
the extent of their ownership with surface in the areas
surrounding the wells.
Under the facts and circumstances of this case, it is
apparent to the Court that the Plaintiff is being properly
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paid for her royalties, since the lease involved in this case
was unitized, and royalties were being paid to the surface
owners in proportion to the ownership of land within the
area of each well. Accordingly, the Defendants are
entitled to summary judgment on the claim of the
Plaintiff for royalties.
Having found in favor of the Defendants on the
issue of unitization of the wells, it is unnecessary for the
Court to reach the remaining issues raised by the
Defendants in their motion for summary judgment.
Copley filed a motion to alter, amend, or vacate. The circuit court
denied Copley’s motion with the exception it noted the correct date of the Lease
was October 3, 2013. Copley passed away on August 16, 2021, and since then this
appeal has been prosecuted by her estate’s representative. For the sake of clarity,
we will still refer to the appellant in this Opinion as “Copley.”
STANDARD OF REVIEW
On appeal, the standard of review for a summary judgment is to
ascertain whether the trial court correctly determined that no genuine issue of
material fact existed, entitling the moving party to judgment as a matter of
law. Coomer v. CSX Transp., Inc., 319 S.W.3d 366, 370-71 (Ky. 2010). Because
summary judgment involves only questions of law and not the resolution of
disputed material facts, an appellate court does not defer to the circuit court’s
decision. Goldsmith v. Allied Building Components, Inc., 833 S.W.2d 378 (Ky.
1992).
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ANALYSIS
As an initial matter we must address the fact that, as Magnum
correctly argues, Copley did not include a statement in her argument showing
where and in what manner each issue was preserved for review. Kentucky Rule of
Appellate Procedure (RAP) 32(A)(4).3 “It goes without saying that errors to be
considered for appellate review must be precisely preserved and identified in the
lower court.” Skaggs v. Assad, ex rel. Assad, 712 S.W.2d 947, 950 (Ky. 1986).
“The decision as to how to proceed in imposing such penalties is a matter
committed to our discretion.” Roberts v. Bucci, 218 S.W.3d 395, 396 (Ky. App.
2007). While this Court could impose sanctions on Copley to include striking her
brief for such an elemental failure to comply with RAP 32(A), because this case
involves rather narrow issues of law about both contractual construction and
summary judgment, we elect to look past these failures and to proceed without
sanctions. We do so trusting counsel will comply with the mandates of RAP 32(A)
in all future appeals.
Copley argues on appeal the clear language of the Lease provides for
her to receive royalties equating to 1/8 of the value of all oil and gas taken from
“wells” which are situated on her property. In support, she correctly notes that
only “wells” are named in the payment terms of the Lease, and she thus contends
3
Former Kentucky Rule of Civil Procedure (CR) 76.12(4)(c)(v).
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the term “wells” should include wellheads, lateral wells, and vertical wells since
they are not distinguished one from another. Furthermore, she argues that to the
extent there is any ambiguity in the Lease’s language, such ambiguities should be
construed against Magnum, the drafter.4
Magnum in turn argues the Lease is clear that Magnum could unitize
Copley’s property and that if she were to be paid 1/8th of all oil coming from
wellheads located on her property, that she would be paid not only for the oil
produced from deposits on her property, but also oil produced by the lateral wells
from deposits below her neighbors’ property as well.
We review the circuit court’s interpretation of a contract, including
determining whether a contract is ambiguous, as questions of law to be determined
de novo. Abney v. Nationwide Mutual Insurance Company, 215 S.W.3d 699, 703
(Ky. 2006); Kentucky Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691,
694-95 (Ky. 2016).
Our review of the Lease requires analysis of not only the language of
the payment terms but the whole of the contract. Moreover, in the absence
of ambiguity, a written instrument will be enforced strictly according to its terms
“and a court will interpret the contract’s terms by assigning language its ordinary
4
The doctrine of “contra proferentem: When interpreting contracts susceptible to two
meanings, we construe ambiguity against the drafter[.]” Majestic Oaks Homeowners Association,
Inc. v. Majestic Oaks Farms, Inc., 530 S.W.3d 435, 441 (Ky. 2017).
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meaning and without resort to extrinsic evidence.” Wehr Constructors, Inc. v.
Assurance Company of America, 384 S.W.3d 680, 687 (Ky. 2012) (quoting Frear
v. P.T.A. Industries, Inc., 103 S.W.3d 99, 106 (Ky. 2003)).
When attempting to discern ambiguities as alleged by Copley, our
standard is that “[a] contract is ambiguous if a reasonable person would find it
susceptible to different or inconsistent interpretations.” Hazard Coal Corporation
v. Knight, 325 S.W.3d 290, 298 (Ky. 2010) (citation omitted).
If the language is ambiguous, the court’s primary objective is to
effectuate the intentions of the parties. Cantrell Supply, Inc. v. Liberty Mutual
Insurance Company, 94 S.W.3d 381, 384 (Ky. App. 2002). “The fact that one
party may have intended different results, however, is insufficient to construe
a contract at variance with its plain and unambiguous terms.” Abney, 215 S.W.3d
at 703 (quoting Cantrell, 94 S.W.3d at 385).
The Lease provided for Copley to be compensated as follows:
4. In consideration of premises, the Lessee covenants
and agrees:
(a) to pay, as royalty, free of cost, the equal of one-
eighth (1/8) part of all oil produced and saved and sold
from the premises;
(b) to pay to the Lessor, as royalty, for the gas
marketed and used off the premises and produced from
each well drilled thereon, the sum of one-eighth (1/8) of
the wellhead price paid to Lessee per thousand cubic feet
of such gas so marketed and used. Payments of royalties
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for gas marketed during any calendar month shall be paid
on or about the 30th day of the following month.
Copley argues that the language “each well drilled thereon” must
mean, or include, each wellhead found on the surface of her property. While the
Lease certainly could have been more clear and distinguished wellheads, lateral
wells, and horizontal wells, we cannot agree to apply or expand definitions which
would either be at odds with common industry usage or would lead to an
inappropriate outcome.
The wellheads located on the surface of Copley’s land were connected
to piping running laterally for thousands of feet under neighboring property and
drew oil and gas along their entire length. In the context of a unitized operation,
and unless clearly established otherwise in the contract, Copley could not expect to
be paid royalties for oil and gas which had been drawn from deposits below her
neighbors’ property merely because they exited the surface on her property. Such
an outcome would also be contrary to the unitizations where “participation” in the
unit is typically proportionate to the oil and gas reserves being contributed to
the unit by each of the entities. To read the Lease as Copley argues would
expand her royalties well beyond payment for the oil and gas taken “from [her]
premises” which would be contrary to the contractual language.
However, while the circuit court correctly noted that “[t]he terms and
conditions of the Lease allow the unitization of the Plaintiff’s property with
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adjoining properties[,]” the Lease only does so with a particularity not addressed
by the circuit court. The circuit court was correct that unitization is prevalent and
common in oil and gas extraction, but we must look to the actual language of the
contract. The Lease explicitly states:
7. Lessor further grants to the Lessee, its successors and
assign, the right to unitize this lease with other leases to
form a drilling unit or units for the proper development
and conservation of the field. However, it is understood
and agreed by the parties that his lease will be unitized
only if necessary to conform to applicable governmental
statutes and/r [sic] regulations.
(Emphasis added.)
When the circuit court wrote “[t]he Defendants state that the Copley
property could not be developed without unitization with other properties, since it
contained only fifty-four acres[,]” it was accepting a mere allegation made by
Magnum that appears to be more of a profitability argument rather than a legal
mandate. Magnum itself argued that “the spacing requirements of KRS5 353.645
would have mandated unitization on this property” but the circuit court did not
conclude that this was true, and we are without sufficient information to draw such
legal conclusion ourselves.
We recognize oil and gas well spacing requirements established in
KRS Chapter 353 were designed to protect the correlative rights of adjoining
5
Kentucky Revised Statutes.
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property owners. See KRS 353.510, KRS 353.610, 805 KAR6 1:100 section 1-3,
and 805 KAR 1:130. However, if this is a situation where a well (including all
subterranean components) could have been placed anywhere on Copley’s property
that complied with the spacing requirements of KRS Chapter 353 at the time it was
drilled, then all the oil and gas produced from that well would have belonged to
Magnum per the Lease and been subject to royalties being owed to Copley, even if
the well drew in oil and gas that had been situated in a larger field that also ran
under neighboring property.
This is so because in Kentucky the ownership of oil and gas is
established by what is known as the “Law of Capture,” which recognizes
the mineral ferae naturae of oil and gas. Oil and gas, unlike other minerals, but
akin to animals, have a power and a tendency to escape without the intervention of
a purported owner. Oil and gas belong to the owner of the land and are part of it,
so long as they are on or in it, and are subject to his control; but when they escape
and go to other land, or come under another’s control, the title to the former owner
is gone. See Texas American Energy Corp. v. Citizens Fidelity Bank & Tr. Co.,
736 S.W.2d 25, 26 (Ky. 1987).
In sum, the circuit court made no analysis as to whether Magnum,
after acquiring the Lease, found itself compelled by any statute or regulation to
6
Kentucky Administrative Regulations.
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unitize the Copley Lease with neighboring properties. Likewise, the record
discloses no licensing applications, permit applications,7 proposals, or notifications
submitted by Magnum to any governmental entity or any interactions whatsoever
between Magnum and the state regarding Magnum’s desire to, or legal need to,
unitize its Copley leasehold with neighboring property.
In the case before us, there is nothing in the contract considered in
separate paragraphs or from the Lease as a whole from which it may be inferred
that the words “only if necessary” were intended to mean that Magnum had
unlimited discretion to decide to unitize the Copley ease or that it had informed
Copley that her lease would be unitized prior to her entering the Lease. There is
nothing here to show what, or any, contrary construction was placed on
the contract before us by the parties at the time it was executed.
Such analysis and information are necessary to abide by the terms of
the contract which allows Magnum to unitize the lease “only if necessary to
conform to applicable governmental statutes and/or regulations.” (Emphasis
added.) To read the lease in such a way as to allow Magnum to determine for
subjective economic reasons, instead of statutory or regulatory mandates, to unitize
Copley’s lease would invite an ambiguity which does not appear from the plain
7
For instance, KRS 353.645: Operation and development as a unit of oil and gas interests in a
pool or pools; application for unit; hearing; unitization order; review under KRS 353.700.
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reading of the lease. “A basic rule of contract interpretation requires that
preference be given to the ‘interpretation which gives a reasonable, lawful, and
effective meaning to all the terms’ over a reading ‘which leaves a part
unreasonable, unlawful, or of no effect.’” Maze v. Bd. of Directors for
Commonwealth Postsecondary Education Prepaid Tuition Tr. Fund, 559 S.W.3d
354, 363 (Ky. 2018) (quoting Comstock & Co., Inc. v. Becon Const. Co., 932
F.Supp. 948, 967 (E.D. Ky. 1994)).
We need not address that part of the circuit court’s order which
dismissed all of Copley’s other causes of action by stating that “[h]aving found in
favor of the Defendants on the issue of unitization of the wells, it is unnecessary
for the Court to reach the remaining issues raised by the Defendants in their motion
for summary judgment.” It is clear Copley elected to proceed only on the
contractual claim in this appeal rather than facing the election later of proceeding
on the claim of fraud in the inducement as opposed to seeking contractual
damages. Hampton v. Suter, 330 S.W.2d 402, 406 (Ky. 1959).
Copley’s prehearing statement does not substantively address the
claims other than contractual damages,8 and Copley did not argue the other claims
in her briefs. Given this lack of argument, we view the other claims as waived and
8
A claim not addressed in the prehearing statement is waived. RAP 22(C)(2), formerly CR
76.03(8).
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not requiring any further comment. See Commonwealth v. Pollini, 437 S.W.3d
144, 148 (Ky. 2014). We note Copley’s veil piercing claim could not be
determined until and unless liability was found against Magnum. Further
discussion on that claim is premature.
CONCLUSION
Accordingly, we vacate the order granting summary judgment and
remand to the Lawrence Circuit Court for further proceedings consistent with this
Opinion.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEES:
Larry D. Brown Eldred E. Adams, Jr.
Prestonsburg, Kentucky Louisa, Kentucky
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